• Raffles Medical reported stellar 1H22 earnings. While some COVID-19-related revenue could taper off, a normalised healthcare business, higher foreign patient load and higher revenues from China should enable it to book sequential revenue growth in 2H.
• We expect Raffles Medical's earnings to grow by 25% this year but remain cognisant of rising costs, and believe 2H profit may decline h-o-h.
• We lift FY22F net profit forecast for Raffles Medical by 29% and FY23-24F earnings by 3-12%.
• Raffles Medical's valuation remains compelling (trading below peer average). BUY with new S$1.65 target price for Raffles Medical from S$1.50, 38% upside with ~2% FY22F yield.

Raffles Medical Reported a Strong 1H22

• Raffles Medical (SGX:BSL)’s recurring PATMI of S$54m (+63% y-o-y, +38% h-o-h) accounted for 77% and 75% of our and Street full-year estimates. Revenue grew 11% y-o-y to S$382m, due to the strong growth in the healthcare business (S$250m, +22% y-o-y).
• Management said that total outpatient visits have exceeded pre-pandemic levels. As some of its COVID-19 related activities have tapered off, the hospital business saw a 5% y-o-y decline in revenue to S$129m. Nevertheless, with the resumption of air travel, its foreign patient numbers have reached ~60% of pre-pandemic levels. This, Raffles Medical hopes, will reach close to 100% by year-end.

Raffles Medical's China Hospitals to Resume Growth From 2H22; New Business Venture

• Raffles Medical’s China business has seen a steady increase in the number of patient visits, with such numbers for its Chongqing hospital doubling over the last year. The Shanghai hospital, which started operations in late 4Q21, underwent a disruption in operations in 1H22 amidst COVID-19 related lockdowns, should see gradual ramp-up in operations in 2H22.
• Raffles Medical has maintained its EBITDA loss guidance of S$3-4m for the Chongqing hospital and ~S$10m for Shanghai hospital in 2022.
• Raffles Medical has received the approval to set up an in vitro fertilisation/assisted reproductive therapy centre in Hainan, China. It plans to invest S$10m in this facility, and expects to start offering services from 1Q23.

Might be Difficult to Maintain Profit at Levels Like That of 1H22

• Normally, Raffles Medical’s 2H revenue and profit tend to be higher than that of 1H. While we believe 2H22 revenue will be higher than that of 1H22, profits may come in lower amidst higher staff costs, increased operating expenses related to the higher patient load in Singapore and the gradual ramp-up of operations in China.

Looking to Shore Up Funding; Trading Below Peer Average

• In addition to a S$135m net cash position, Raffles Medical has announced the establishment of a S$1bn multi-currency medium-term notes programme, which will enable it to raise additional funding.
• Our target price, which includes a 2.2% ESG premium, implies 33x 2023F P/E – in line with its regional peer average.

Source: RHB Invest Research - 2 Aug 2022